Future Demand for U.S. Flue-Cured Tobacco:
Heat-Not-Burn vs Nicotine Solution
May 13, 2015
Dr. Blake Brown
Hugh C. Kiger Professor
Agriculture & Resource Economics
College of Agriculture & Life Sciences
2014 World Flue-Cured Production 4.49 million MT
Other
13%
U.S.
6%
Brazil
16%
Zimbabwe
6%
PRC
59%
Global Supply of Flavor Style Flue-Cured:
U.S., Brazil and Zimbabwe
1200
1000
800
600
400
Zimbabwe
200
US
2015P
2014E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
Brazil
Source Brazil & U.S.: Universal Corporation. “World Leaf Production as of Feb 3, 2015.”
Source Zimbabwe: Zimbabwe Tobacco Association “Weekly FCV Report 14.07.2014”
Domestic Use and Exports of
U.S. Flue-Cured Tobacco
300.00
250.00
200.00
Domestic
150.00
Exports
100.00
50.00
-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
U.S. Unmanufactured Exports
of Flue-Cured Tobacco
(Tonnes farm weight)
160
140
120
100
World
EU27
PRC
80
60
40
20
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: USDA-FAS
EU & US Cigarette Consumption
billions of cigarettes
800
700
600
500
400
300
200
100
0
728 billion
513 billion
372 billion
270 billion
2005
Sources:
2006
2007
2008
2009
2010
2011
2012
EU
US
2013
Tax Burden on Tobacco, Historical Compilation. V48, 2013 Orzechowski and Walker.
Releases for consumption of cigarettes 2002-2013. Taxation & Customs. European Commission
Market Challenges to US Flue-Cured
• Large flue-cured inventories in the global tobacco supply
chain
• Unfavorable exchange rates
• Continued erosion of cigarette consumption in developed
countries due to health concerns
• Hostile regulatory and tax environment for cigarettes in
EU & US
• Changes in nicotine delivery technology;
e.g. E-cigarettes & heat-not-burn
Market Opportunities for US Flue-Cured
Farmers
• Increased demand for high quality flavor style flue-cured
– bans on flavorings in cigarettes
– growing market in China for “higher end” cigarettes
• Ability of US farmer for strict adherence to both
production and social protocols
Tobacco products will undergo a technological
revolution over the next
5-10 years
• Will non-combustibles dominate traditional
combustibles in the U.S. and EU?
• How new products are regulated and taxed will
greatly impact their growth
e-liquid products: “e-cigarettes”
•
•
•
•
Sales estimated at $2.5 billion in U.S. in 2014
Estimates of slightly smaller sales in Europe
but sales are slowing
Vaping category showing dominance
– cig-a-likes category slowing in growth
– Closed and open systems showing growth
• All major tobacco manufacturers have invested in
e-cigarette products
“heat-not-burn” products
CONTAIN TOBACCO LEAF
• PMI introduced iQOS “Marlboro HeatSticks” in Japan
and Italy
– $680 million invested in reduced-risk factory in Italy
• Reynolds American introduced new heat-not-burn
product, Revo, in Wisconsin in February 2015
“heat-not-burn” products
•
PAX
• JTI buys
• Multitude of “Vape Pens” on market
– Most can use pipe tobacco
Both categories face similar challenges
• Regulation looms
– FDA has issued deeming regulations
– Some municipalities have issued bans
– Will regulation be less stringent than for combustibles?
• Mixed taxation at state and local level
• Health community is divided
• Do they yield a similar experience to combustibles? How
many smokers will switch?
“IBISWorld expects the growing popularity of ecigs to drive the growth of international trade at an
average annual rate of 2.5%, to an estimated $30.5
billion in 2019.”
IBISWorld Industry Report. Global Cigarette & Tobacco Manufacturing. P.7.
June, 2014.
Impacts of Technological Change
Consider 4 scenarios:
1. Base Case: No growth in E-Liquid or Heat-not-Burn
products
2. E-Liquid products grow to $30 billion by 2019 in US
&EU
3. Heat-not-burn & E-Liquid products, equally split,
grow to $30 billion by 2019 in US & EU
4. Heat-not-burn products grow to $30 billion by 2019
in US & EU
Impacts of Technological Change
• E-Liquid products
– Tobacco production for nicotine production
– Currently 8,165 Tonnes (18 million pounds) of
tobacco for $5 billion in e-cig sales
• Heat-not-burn products
– Quality of tobacco is more important than ever
– Change in quantity demanded…less tobacco per
“smoke” than combustibles
EU & US Non-Combustibles grow to $30 billion by 2019
US Flue-Cured Production for EU & US Markets:
US provides 20% of US&EU E-Liquid Market
Heat-Not-Burn contains 40% tobacco content of Combustible Cig
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
88,904
69,186
9,798
4,899
-
58,931 60,981 63,036
Tobacco Production for ELiquid
All HNB
50/50 HNB & E-Lquid
All E-Liquid
2019: No Change in
Tobacco Product Mix
Current
Traditional Tobacco
Production
EU & US Non-Combustibles grow to $30 billion by 2019
US Flue-Cured Production for EU & US Markets:
US provides 30% of US&EU E-Liquid Market
Heat-Not-Burn contains 60% tobacco content of Combustible Cig
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
88,686
69,186
14,696
7,348
-
58,931 62,006 65,086
Tobacco Production for ELiquid
All HNB
50/50 HNB & E-Lquid
All E-Liquid
2019: No Change in
Tobacco Product Mix
Current
Traditional Tobacco
Production
What can we conclude?
• Many unknowns
– Will either product be preferred over
combustibles?
– Will E-Liquid or Heat-not-burn dominate?
– How much US vs foreign tobacco will be used?
– How will non-combustibles be regulated and
taxed?
– How rapidly with non-combustible use grow?
What can we conclude?
• Many unknowns
• Using a projection of $30.5 billion in sales in US and
EU in 2019 decreases use of US flue-cured in the US
& EU by 5-10 thousand Tonnes
What can we conclude?
• Many unknowns
• Projected $30.5 billion in sales in US and EU in 2019 may decrease
use of US flue-cured in the US & EU by 5-10 thousand MT
• BUT success by heat-not-burn could spur rapid
change from combustibles to non-combustibles.
Success could be characterized as:
–
–
–
–
Demonstrated lower risk than combustibles
Less strict regulation than combustibles
Lower taxation than combustibles
Consumer adoption over combustibles and preference
over e-liquid products
What can we conclude?
• Many unknowns
• Projected $30.5 billion in sales in US and EU in 2019 may decrease
use of US flue-cured in the US & EU by 5-10 thousand MT
• BUT success by heat-not-burn could spur rapid change from
combustibles to non-combustibles
• Domination by E-liquid products could cause US
tobacco production to be larger than if heat-not-burn
dominates…but production would be very different
What can we conclude?
• Many unknowns
• Projected $30.5 billion in sales in US and EU in 2019 may decrease
use of US flue-cured in the US & EU by 5-10 thousand MT
• BUT success by heat-not-burn could spur rapid change from
combustibles to non-combustibles
• Domination by E-liquid products could cause US tobacco production
to be larger than if heat-not-burn dominates
• If heat-not-burn dominates over E-Liquid products:
– Quantity demanded of tobacco could be smaller
– But needed acreage may be larger
– Producers will earn higher premium for high
quality tobacco for heat-not-burn